The future of sugar in South Africa – a bittersweet story?

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Background

In an effort to curb the public health scourge of obesity, diabetes and heart disease linked to excess consumption of refined sugars, the South African government announced its intent to introduce a tax on sugar-sweetened beverages, effective April 2017. South Africa joins a host of other nations, in both developed (e.g., France) and emerging markets (e.g., Mexico, Philippines), who have already implemented, or are considering a sugar or fat tax. While public health lobbyists commend government for its bold move, beverage producers are understandably concerned about the potential for

negative financial and reputational impacts on their business given the experiences of companies impacted by these taxes in the rest of the world. They are also keen to highlight the important role they play in supporting the South African economy. Understanding how new legislation will impact the dynamics of supply and demand and change the rules of the game in terms of “social licence to operate” will be vital for beverage producers. This will assist them to develop strategic responses that enhance their competitiveness and increase value across the value chain.

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The problem with sugar

The World Health Organization recommends both adults and children limit their daily sugar intake to less than 10 percent of their total energy intake. It also suggests that a further reduction to below 5 percent per day would provide additional health benefits.1 For an adult male, this equates to six teaspoons or 25 grams of sugar a day. Given that a standard 330ml can of soda contains 35 grams of sugar and 250ml of juice contains 25 grams of sugar, the fundamental implications for the beverage industry become clear.

Across the world, soft drinks and dairy together constitute almost 56 percent of the average total sugar purchased per capita per day.2 According to Euromonitor International, the average South African consumer buys between 30 and 54 grams of ‘hidden’ sugar a day across all products, including, amongst others, beverages, confectionery, cereals, baked goods, biscuits, snacks, soups, spreads and sauces. This is high compared to emerging market contemporaries such as India and China (5 grams and 29 grams, respectively). In addition, reduced sugar soft drinks currently only make up 3 percent of total soft drink sales in South Africa, not dissimilar to the very slow uptake we see across the world: uptake in India is at less than 1 percent, Brazil is at 6 percent and and Mexico is at 9 percent.2

These figures make it clear why the South African government is staging a public health intervention specifically targeting the beverage sector.

Global sugar trends

Science links sugar to obesity, diabetes and cardio-vascular disease

Consumer pressure increases to limit hidden sugar

Markets implement regulation and apply sugar tax

Sweeteners and sugar alternatives gain traction, albeit slowly

Increasing consumer and regulator demand for more transparent labelling

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The trade-off: consumer health benefits versus producer volume lossesWithout diminishing the complex interrelationships that exist between socio-economic factors and health, the projected public health benefits achieved through the introduction of a sugar tax on sugar-sweetened beverages are well recognised. In India, a 20 percent sugar tax was projected to decrease prevalence of Type 2 Diabetes by 1.6 percent over 10 years. A similar study in South Africa suggested a 4 percent reduction in prevalence over 20 years.3

Supply Demand Rules of the game

• Product reformulation: Consumer packaged goods (CPG) companies will need to reformulate their products to reduce sugar content, or launch alternative low-sugar products

• New supply chains for new ingredients: companies will need to identify and source new sweeteners (stevia, xylitol) preservatives and additives to replace sugar in a highly competitive market where supplies are likely to be limited in the short term, especially for natural ingredients

• Reduced sales of high sugar products: sugar taxes have been shown to be effective in reducing demand

• Growing market for healthy alternatives: consumers are increasingly interested in healthy products, creating new sales opportunities for low-sugar products, especially when naturally sweetened

• Increasing activism and awareness: greater consumer awareness of sugar and health issues with more pressure on companies to respond

• Product labelling: CPG companies will need to clearly indicate the sugar content of their products

• Possible sales and advertising restrictions: In addition to the tax, companies could face restrictions on advertising high-sugar products, or from selling certain types of products to children (e.g., high- sugar energy drinks) or offering certain marketing discounts (e.g., two for one deals)

For beverage producers however, a sugar-sweetened beverage tax will have far reaching implications on supply, demand and how they meet new social responsibility imperatives. The only real data to date is that of taxed sugar-sweetened beverage volumes declining by an average of 6 percent (−12ml per capita per day) in Mexico in 2014 after the first full year of sugar taxation. The biggest decline was seen in households of low socioeconomic status, averaging a reduction

of 9 percent during the period.4 The table below outlines some of the key implications identified by Accenture’s Consumer Goods and Services and Sustainability practices.

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In South Africa, consumers mostly consume sugar-sweetened beverages from the multinational, Coca-Cola. It sold 53 percent of off-trade soft drink volumes in 2014. The next 13 percent of off-trade volume was sold by large local consumer goods companies such as Tiger Brands, Pioneer and Clover. A myriad smaller local beverage companies each contribute less than 2 percent by volume. Amongst these are the Pick & Pay and Woolworths private labels, Continental, and Quality and Kingsley Beverages.5 From 2010 to 2014, these players have largely seen growth in volumes, taking modest market share from the likes of Coca-Cola.

With the introduction of sugar tax, the extent of the impact will depend on the scale of the producer and its ability to innovate on cost, efficiency and growth dimensions.

Multinationals• Multinationals tend to weather

price shocks much better as they have developed strategies that facilitate diversification of their product portfolio in categories where market growth may be strong (e.g., flavoured sparkling water) and can reformulate, offering sugar alternatives or smaller pack sizes.

• High sales volumes protect multinationals against margin erosion in the short term.

• Multinationals have the marketing budgets to leverage the digital advantage.

Smaller local and private label retailers• Smaller local beverage companies

tend to produce larger pack

formats, which will attract a higher sugar tax.

• They lack scale and do not have the product development budgets to innovate around product, packaging or sugar alternatives, nor do they enjoy the protection high sales volumes afford.

• This group is the most vulnerable to business shut down or acquisition as the industry consolidates.

Local consumer packaged goods (CPG) companies • This group has the ability to

change, to innovate and disrupt, and ultimately improve industry competitiveness.

• Local CPG companies have the choice to reduce exposure. If they do, the consequences for the local CPG industry and economy are potentially dire.

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For South African sugar-sweetened beverage producers, responding effectively will require a value chain strategy that builds trust, gains them both the licence to operate and the licence to grow, and drives competitiveness for the company, its partners and suppliers, and the economy.

Accenture’s approach–the concept of “Value for all or no value at all”

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Economy

Beverage producer

Supplier/ Partner Quality Efficiency Productivity Livelihoods

Cost efficiency Social licence to operate and

grow Competitiveness Secured supply

Value

Trust

ValueValu

e

Innovation and invention• Diversification of categories• Healthy sugar alternative (e.g. stevia)/

low-sugar options

Marketing strategies including digital• Consumer preferences and experience

engagement • Proactive labeling transparency

Pricing strategies• Industry consolidation through M&A• Alternative market/channel/product

focus

• Do I import or source my raw materials locally?

• Do I understand the full impact on the value chain?

• Do I understand the local economic drivers?

• What sugar alternatives are available?

• Who do I engage or partner with?

L

icenc

e to

ope

rate

Licence to grow

JobsEnvironment

GDPStability

Exports

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In conclusion

References:

The introduction of a sugar tax in South Africa, as in the rest of the world, will have a positive impact on public health, contributing towards a reduction in morbidity and mortality associated with obesity and diabetes. For sugar-sweetened beverage producers, however, this tax signifies a potentially negative impact on volumes, especially for players who do not have the scale to absorb or respond to the tax-induced price hike. Whether the price is transferred to the consumer or absorbed by the producer, the sector will nonetheless be impacted, with the “demonising” of these products potentially having a damaging effect on brand reputations.

1. WHO | Healthy diet www.who.int/mediacentre/factsheets/fs394/2. Bandy L (2015) Nutrition trends: The Sugar Free Consumer. Euromonitor International3. Manyema M, Veerman JL, Chola L, Tugendhaft A, Labadarios D, Hofman K (2015) Decreasing the Burden

of Type 2 Diabetes in South Africa: The Impact of Taxing Sugar-Sweetened Beverages. PLoS ONE 10(11): e0143050. doi:10.1371/journal.pone.0143050

4. BMJ 2016;352:h6704 5. Passport: Softdrinks in South Africa (2015) Euromonitor International.

There is opportunity to innovate, disrupt and redefine the industry through the introduction of healthier alternatives to sugar, more relevant product formulations and pricing strategies, as well as business model innovations that enhance competitiveness. What is clear, however, is that finding a sustainable solution will require cooperation and collaboration across the value chain by regulators, suppliers, producers, customers and consumers.

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About the Author

Dr Roze Phillips is a Managing Director within Accenture Consulting for Sub-Saharan Africa. She has spent over 15 years consulting in consumer-related industries, focusing on helping businesses drive better strategic outcomes with a particular emphasis on transforming business in Africa. She holds Bachelor of Medicine and MBA degrees from the University of Cape Town and is a student of Future Studies. She is based in Johannesburg and can be reached at rozett.phillips@accenture.com.

With special acknowledgement to:

Melissa Barrett, Oliver Grange, Christopher Hook and Luke Mann